Send a Tweet
Most Popular Choices
Share on Facebook Share on Twitter Share on LinkedIn Share on Reddit Tell A Friend Printer Friendly Page Save As Favorite View Favorites
OpEdNews Op Eds

How Wealth and Income Inequality Cause Unstable Credit and Asset Price Bubbles

By       Message Elwood Anderson       (Page 1 of 2 pages)     Permalink    (# of views)   1 comment

Related Topic(s): ; ; ; ; , Add Tags
Add to My Group(s)

View Ratings | Rate It

Author 985
- Advertisement -

Income and wealth inequality is the root cause of financial instability. Capital, and the need for capital must be balanced for an economy to function stably.

If the accumulation of capital exceeds the need for capital to fund growth, the taxes on wealth and capital gains must be increased, and taxes on consumption and consumer income decreased .

- Advertisement -

If consumer demand, and the attendant need for capital, outpace capital accumulation, the reverse is required. Taxes then should be shifted from wealth and capital gains to consumption and consumer income.

Over the past several decades capital accumulation has outpaced the demand for capital, largely due to reductions in top bracket tax rates and stagnation of middle class incomes. The discussion that follows shows what happens when this occurs.

- Advertisement -

Enterprises need capital to expand and take advantage of new opportunities. This allows economies to grow to accommodate increases in population and the attendant need for new jobs.

If too little capital is accumulated, growth will be curtailed. If the effect is severe enough, sufficient growth will not be achieved to accommodate population increases and the need for additional jobs, and the standard of living will fall.

If too much capital is accumulated, rates of return on capital drop. As rates of return drop, capitalists seek ways to improve them through the use of leverage or the use of techniques to increase the demand for credit.

- Advertisement -

If leverage is used, risk increases, necessitating even larger rates of return. This leads to a potentially unstable situation. So there is a limit to the amount of leverage that can be used.

As the limits of leverage are reached, investment banks and hedge funds will look for ways to stimulate demand for credit. This can be done by relaxing the standards for issuing credit, and compensating by using techniques that hide risk.

Next Page  1  |  2


- Advertisement -

View Ratings | Rate It

Elwood Anderson is a retired engineer/businessman living in Las Vegas. His blog can be accessed at

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon Share Author on Social Media   Go To Commenting

The views expressed herein are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

How Wealth and Income Inequality Cause Unstable Credit and Asset Price Bubbles

The American Plutocracy

National Newspaper Week